[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And as always, today on these Friday episodes, we take something in the news and go one step deeper, which is never actually one step deeper when I’m at the helm of anything because I’m gonna find the bottom of the rabbit hole whether we like it or not. And so, today, we’re on part three of my series on cryptocurrency. And today, we’re gonna talk about decentralized finance. But let’s start off by asking the question: Why now? Why talk about cryptocurrency now? Well, if you’re paying attention to the news, you probably know about the collapse of the crypto exchange FTX and the collapse of cryptocurrency on a value basis broadly over the year 2022. And it’s the talk of the town in a lot of personal finance circles. A lot of personal finance gurus were pitching FTX for paid advertisements. And so, this four-part series is designed to be a primer on crypto. And I say it’s likely to be a four-part series ’cause there’s a potential that there’ll be a fifth episode. But as I continue to block things out, it’s looking like we’re gonna be on track. And my disclaimer that I’ve said before the other shows but I’m gonna say again here is: This is a primer, not a PhD dissertation. I’m gonna gloss over a bunch of stuff. I’m gonna oversimplify things. But this is just meant to be a primer.

[00:01:34] So, we left off things last Friday with Bitcoin failing the money test because Bitcoin cannot function as a medium of exchange, a store of value, or a unit of account. So, then the question inherently is: Does that mean that all cryptocurrency fails? Because what I said in the last Friday’s episode was that Bitcoin is not the only show in town. There are things like Ethereum, Litecoin, and a whole lot of other what are called “altcoins” that are out there. Can any of them function as money — as a medium of exchange, a store of value, and a unit of account? And, well, ladies and gentlemen, I am a CPA, so I gotta give you the CPA answer, which is: It depends. And as long as I’m talking about my CPA, I should probably point out that this episode is not an offer to buy or sell a financial product or should be construed as financial advice in any way, shape, or form. There is literally nothing that I say that you should go, “Yes! Let’s go put money into it.” No, no, no, no, no. All decisions are yours, ladies and gentlemen, and are your sole responsibility at your sole risk. And I have to say that because we’re gonna be talking a little bit about investments today. 

[00:02:45] So, let’s start off. A cryptocurrency will be able to function as money if you can create it so that it will function as a medium of exchange, a store of value, and a unit of account. There is globally an example of a — this is Dylan Bain’s term — pseudocryptocurrency that actually did all three of those things and still does in certain parts of the world. And that is mobile minutes that were used in money in Kenya in the early 2010s. It basically became a representative currency. What they were doing is that the mobile phone minutes, you could buy the minutes and put them on your phone. And when you would go to the store or at the marketplace, you could transfer those minutes from phone to phone, which looks an awful lot like transferring from a crypto wallet to a crypto wallet. So, it’s a peer-to-peer unit of exchange. What they were exchanging were minutes that then had a monetary value and they were doing it because you could get around a lot of the currency restrictions and things started to become priced in minutes. And this was then on the mobile phone network, which was outside of the government of Kenya, which then of course was able to function as a lot of what is promised in the cryptocurrency markets. It was relatively unblockable. It was outside government interference. There were only so many minutes that were in the system, etc., etc., etc. And so, what the mobile minutes were functioning as was a representative currency. And you can go back two episodes to when I talked about what is actually money. A representative currency is when the currency is representing some sort of other thing, okay? And so, in this case, it’s not an actual physical product like gold. It’s a verifiable record like unused mobile minutes. Under this system in Kenya, the mobile minutes that were being exchanged were functioning as money in their own right. And so, as we go further into this discussion at decentralized finance, which I just gave you an example of how that might work in the real world and what a lot of these crypto bros are modeling their networks after, it’s again really important to separate the blockchain as a technological thing from cryptocurrency. 

[00:05:01] So, we’re talking about cryptocurrency, not necessarily the blockchain. Yes, they are related, but not inherently so. So, here’s the big deal. As different ones of these cryptocurrencies are competing, if any one of them were able to become a medium of exchange, a unit of account, and a store of value, the prize is trillions of dollars. This would be a revolutionary thing, and this is the promise that a lot of people in the cryptocurrency space are hoping for. And so, what this is starting to become called is “decentralized finance.” The blockchain architecture that is the ledger that tracks all the transactions for a particular cryptocurrency are stored on things called the blockchain. Each block is nothing more than a listing of all the transactions that are chained to the previous blocks and therefore, you can see transactions and individual pieces of cryptocurrency moving from wallet to wallet over time. That’s what a blockchain is. And so, when you build a network for a particular blockchain protocol and the reward for working within that system would be the piece of cryptocurrency, whether it’s Litecoin, Ether, Amp, what have you, LUNA’s another great example of it, the blockchain infrastructure is then stored in decentralized servers. They are outside the control of a central banking system and therefore, the name “decentralized.” There isn’t one centralized authority controlling the servers. There might be a centralized authority controlling the protocol, that is, the actual code that makes it all work. But as far as where the servers are and who operates the servers, that isn’t in the same hands. The transactions are then governed by those protocols of that particular cryptocurrency, and it would not be regulated because it’s outside the central banking system. So, anybody with a crypto wallet and an internet connection can participate in a decentralized finance system.

[00:07:01] Now, we’re gonna start calling decentralized finance “DeFi” because that is the least the letters that are out there. But there’s a lot of advantages to this and the reason a lot of people are really excited about that. So, we’re gonna kind of go through some of those DeFi claims one by one here. And that is, the first one is this is unstoppable. And the promise is that this will lead to a completely open free market. So, anybody who’s been working as a small business owner and has been dealing with things like Venmo or PayPal or Cash App knows that one step out of line can get their accounts locked. So, for example, let’s say that you are a bladesmith and you’re making knives and you start selling those knives and you charge Venmo. And then somebody says, “Oh, yeah. Thanks for the knife, bro” and sends you the money. Venmo’s architecture will actually go through and look for keywords and then lock that account because knives are considered weapons, and Venmo’s terms of service does not allow you to use it to buy and sell weapons. Now, this, of course, then causes a freeze on the account, which then shuts down that person’s business, and you can kinda see where this is going. There is a claim that’s out there in the world that, you know, he who controls the gold makes the rules. It’s also known as the Golden Rule. So, it will also then follow he who controls the pipes in which the gold flows also gets to make the rules. So, the lack of regulation would, in theory, lead to this flourishing market where everybody could freely enter into contracts and commerce. The funds couldn’t be stopped by banks or governments. 

[00:08:30] And people point to the Canadian convoy protests. This is where the Canadian truckers that took over Ottawa blocked the streets and shut down a bunch of major arteries over the COVID vaccines. And so, this occurred in early 2022. So, let’s just never mind the COVID issues ’cause I emphatically don’t want to get into that. And I try to keep these to, you know, 25 to 30 minutes. And if I’ll talk about covid, I’m gonna be here all day. The issue was how the protest was funded. So, it’s important to note that the Canadian trucker protest was largely funded by sources outside of Canada, mostly from the United States. GoFundMe was set up to help support them because if you are a Canadian trucker and you’re sitting there parking your truck, shutting down a road, there’s a couple of things that should already be apparent. You still have to eat, sleep, and use the bathroom. And a lot of truckers have — in them, so the sleeping part isn’t the problem. But the fuel for the trucks cost money. And if the trucks are parked on a street shutting down that street, they’re not on the road moving cargo, which means that those truckers are not getting paid. So, people in the States and in Canada set up a GoFundMe, which then got suspended. And because Justin Trudeau declared a state of emergency about the protest, they shut down all the traditional avenues to fund these people. The protestors then used Bitcoin and specifically Bitcoin to start circumventing the blockage. And what was required to do that was for each one of the truckers to have an interconnection and a cellphone. Remember what I said about if you have a crypto wallet, well, that’s gonna be on your cellphone. This created a wallet whack-a-mole because what was happening is the truckers would open a wallet, transfer the Bitcoin in there, and then use an exchange to be able to transfer it into Canadian dollars and then be able to pay for their stuff. 

[00:10:13] But if you’re one of those people who is a big fan of things like the US PATRIOT Act and, you know, making sure we can’t fund terrorism, then you probably know that you also supported something called a Know Your Customer law. And that was designed to shut down terrorists and other nefarious things like, you know, child sex trafficking, weapons trafficking, etc., etc. You get the idea. And so, the idea was that if you’re handling anything of monetary value, you have to know who your customer is. It can’t be anonymous. And so, what ended up happening as the Canadian governments and banks started closing the on and off ramps to the exchanges, that is, I couldn’t put money into the exchange if I was known as one of these truckers with a crypto wallet and if I also I wasn’t able to get my money back out. And so, in the end, the transparency of the blockchain, the fact that it is not centrally controlled was actually what hurt it because people would just look at the blockchain and go “Oh, yeah. I can see where these monies are working for. All I need to know is where one of them are and I can start identifying all the rest.” So, it became easy to identify the protestors and start freezing their traditional accounts. 

[00:11:18] So, the claim that it’s unstoppable and that it’s not trackable is in direct opposition to how the blockchain architecture actually works because transparency is the point. It’s noting that this is akin to the early days of the internet when people thought, well, I can get on the internet and no one knows your dog on the internet, right? And you can see the username, but you don’t know who it is, at least in theory. So, the ups and downs of the whole convoy thing was the government showed that they can and have huge amounts of financial power over US citizens. And again, I said if you’re in the United States, this applies through the US PATRIOT Act. But it also showed that you could, in fact, move funds around and circumvent the system. But decentralized finance’s Achilles’ heel is that it still relied on traditional systems, that is, the traditional banks and an internet connection. There was talk during the Canadian protest of just shutting down the Wi-Fi networks in and around where the truckers were. And if you think for a second that they can’t do that, they totally can because if you’re using cryptocurrency and you’re reliant on your smartphone and your digital wallet, you’re maybe not reliant on the banks per se, but you are reliant on telecoms. And if you’ve ever had to deal with a large telecom, you know that their customer service is the absolute worst in the entire world. That is by design, ladies and gentlemen. And so, you’re trading one devil — the banks, heavily regulated — versus the telecoms — not so regulated. So, I guess you get to pick your poison in this particular case. 

[00:12:53] The other thing that is interesting that came out of the truckers’ convoy is that we all got to learn the FBI can seize Bitcoin. And they started doing this way, you know, a couple of years prior, but it became very noticeable during the truckers’ protest. Why? Well, because Canadian authorities raided the home of the guy who was organizing this Bitcoin for the truckers funding scheme and seized about half of his cryptocurrency. And when I was doing research for this episode, in the beginning of November of 2022, the FBI and the United States seized $3.36 billion worth of Bitcoin. So, the idea that it’s unstoppable is not necessarily true. It’s a lot like when people said, “Well, Apple can’t get a computer virus.” It really wasn’t the case. It just meant that Apple hadn’t got enough attention yet such that people were actually targeting Apple to try to give them computer viruses. It is very similar to Bitcoin. 

[00:13:51] So, let’s go on to claim number two is that decentralized finance is anonymous. And it’s not because you have a crypto wallet. That wallet has an address. That address is, for all intents and purposes, it’s just your username. It’s not anonymous. There is not a single cryptocurrency that is actually anonymous. It’s pseunonymous, which means that you use a pseudonym in place of the name. You need to have a name of some sort, even if it is just your wallet’s address, because that’s how people send you money. This is how they shut off the on and off ramps during the truckers protest. And if you can’t get the money out and you can’t exchange the actual cryptocurrency because it’s not functioning as a medium of exchange, it’s not very useful. Know Your Customer laws are increasingly popular in Western nations. They are follow-ons from anti-organized crime and terrorism laws. When you are going to war with Ukraine and people are worried about you funding the Russians or you’re fighting terror and you’re worried about people funding the terrorist or you’re going up against drug cartels and people are worried about you working with the drug cartels, the populations want their representatives to stop that behavior so they feel safe. And this goes back to the entire thing about the person who will give up freedom in exchange for safety and security will get and deserve neither. And so, this is a very similar thing. Are Know Your Customer laws actually a good thing? Well, I mean, I could call, I could argue it either way. But in terms of decentralized finance being anonymous, Know Your Customer laws are coming to these crypto platforms, especially if they actually start to become mediums of exchange, stores of value, or unit of accounts. Why? For all the reasons listed: anti-organized crime and terrorism.

[00:15:38] Alright. Let’s look at claim number three. You can’t judge the future of technology by its current abilities and this is the future. Okay. So, basically, let’s just unpack this. They’re basically saying that just because you can’t go down to your sandwich shop and buy sandwich with LUNA, which is one of these DeFi cryptocurrencies, well, just because you can’t do it now doesn’t mean you won’t do it in the future. And, again, let’s go back to the top of the show. Any cryptocurrency that becomes successful in becoming a unit of exchange, a unit of account, and a store of value, the upside is trillions. And so, if you’re an early investor into these things, you could stand to be one of these crypto millionaires. And so, they’re mostly correct on this though. It’s entirely possible one of these will become a medium of exchange. 

[00:16:28] And so, the history is littered with examples of technology where people, you know, doubted it, said that it wasn’t gonna happen, you know, people wouldn’t like this. And this is everything from online retailers. Why would you buy it online when you could go to the store and try it on? People love to try on their stuff. Yeah, it’s just like Americans love their cars, right? Or you wanna make sure you have the film in the camera. Digital cameras are just too expensive and too clunky and not reliable and it’s not as good as having the light actually come through the lens and imprint on the film. I mean, history is littered with examples of where, you know, when the technology first came out, its current capabilities at that time were not anywhere close to what they are today. But — and here is, and it’s a pretty big “but” here — it’s a lottery effect. This ignores a huge outsized piles of things that were also considered the future because, and I’ve said this before in the show, every lottery winner gets their 15 seconds on the evening news. But if we made you watch all the losers get also 15 seconds, you’d have to watch, not 15 seconds, but over 24 years consecutively. And so, there’s just tons of pieces of technology that were out there that were considered the future. And some of them were ahead of their time and some of them we just don’t even think about because we only focus on the ones that won because the upside was so huge. 

[00:17:56] So, here’s the main issue that I see with this claim that cryptocurrency is going to be inherently in the future. Will crypto be a core part of a future financial system? In my opinion, yes. 100%. Cryptocurrency is going to be a core part of a future financial system. Will crypto that you use and were an early investor in be that core piece of the future financial system? More than likely not. And like I’ve said before, whoever wins this game, the upside is huge and therefore, it’s probably gonna be a central bank. Why would a central bank give up its position in the economy when they are already talking about central bank cryptocurrencies? It’s not a big jump to see where this technology is going to go. And one of the things that a central bank can do that a decentralized platform cannot is grant a cryptocurrency instantaneous legitimacy and the regulations that make this system easy to handle and more trustworthy than this Wild West that we have right now. After all, when somebody steals your Instagram platform, what do they try to sell everybody? Oh, that’s right. Cryptocurrency. Scams in the crypto universe are huge. Why? Well, because no one’s actually watching the markets right now and there’s no regulations. And that doesn’t mean that there aren’t scams in a regulated market. There’s just less of them and it’s easier to insure against and recover stolen goods. The future of cryptocurrency is reliant on widescale adoption, and widescale adoption is going to require regulations. It’s going to require Know Your Customer laws. And you can see where this is going. 

[00:19:39] When we talk next week and we talk about FTX, I’m going to talk about several other cryptocurrency scandals. And there have been a lot. It’s not out of the realm of decency to say cryptocurrency is stumbling one scandal at a time into understanding why financial regulations exist. And anyone who studies the history of financial regulations understand that there are certain things that have to be there, otherwise the system just isn’t as trustworthy as needed for things like a market-based economy, free enterprise, etc., etc., etc. The bottom line here is, in my opinion, crypto likely has a very bright future, but what that bright future actually looks like is anyone’s guess. Are we gonna end up with a central bank currency? Or is one of the ones of the decentralized finances going to figure out how to become a medium exchange that can be widely adopted across the population? I don’t know. But I do know that on one side or the other, we’re going to end up here because the technology itself is just too powerful. Like the lottery, a good guess is gonna pay off huge. Maybe LUNA, maybe Amp, maybe Dogecoin is going to be the thing that we all agree upon as our agreed-upon fiction for a medium of exchange, a unit of account, and a store of value. But I don’t know any more than I know what the Powerball is going to be this next upcoming weekend. 

[00:21:05] And like I’ve said before, the entire crypto industry is stumbling one scandal at a time into understanding why financial systems have regulations. And next week, ladies and gentlemen, we’re really gonna dive straight into that and we’re gonna start talking about FTX, Sam Bankman-Fried, and everything else that’s around that dumpster fire. I gotta tell you it’s like staring into the abyss and the abyss has started to stare back at me.

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